Mortgage loan discrimination is in the news again, as banks are being more closely scrutinized by the government for compliance with the Community Reinvestment Act of 1977. The law encourages banks to make its credit and other services available to all persons in the community and forbids the practice of redlining.
Recently, the primary overseer of the law, the Office of the Comptroller of the Currency, gave JPMorgan Chase (JPM 1.44%) two black eyes in a six-month period for failing to adhere to the letter of the law.
The lowest rating of the big four
The Wall Street Journal notes that JPMorgan's rating of "satisfactory" for its banking and credit card businesses is the lowest score among peers Bank of America (BAC 1.70%), Citigroup (C 2.82%), and Wells Fargo (WFC -0.26%). All those banks ranked as "outstanding," though B of A's credit card arm also received a "satisfactory" rating.
Does this mean that JPMorgan has been amiss in its lending practices? Apparently so. The OCC had alerted the banks that it wasn't going to put up with any funny business when it came to untoward treatment of bank customers, and this shows that it wasn't fooling around.
Big banks often on the wrong side of the law
You may remember that the CRA has periodically been blamed for hastening the mortgage meltdown by pushing banks to lend to those with scanty means and barely a whisper of a chance of being able to repay. Now, a study by the National Bureau of Economic Research concludes that yes, the Act definitely contributed to a riskier lending climate, as well as a laxity in underwriting rules at government sponsored entities Fannie Mae and Freddie Mac.
But, wait: There's another side of this story. Bank of America and Wells Fargo have both paid huge settlements to put to rest charges of discriminatory lending practices. In these cases, however, the lenders weren't being accused of ignoring low-income borrowers, but of railroading them into loans that they could not afford. In fact, many borrowers who could have managed a standard loan had fees and other costs piled on to the point where the mortgage payments became untenable.
One Fool's take
Therefore, it seems unlikely that JPMorgan avoided low-income and minority customers out of fear of a replay of the subprime market crash. However, it also is doubtful that these downgrades will have much of an effect upon its lending business. After all, despite its stellar rating, Wells Fargo's recent review by the OCC triggered a sizable outcry from consumer groups that claimed Wells was not living up to its responsibilities under the CRA.
As we know from both these banks' recent earnings reports, mortgage writing pumped up their revenues in a big way. To me, that indicates that discriminatory lending behavior on the part of banks, whether real or perceived, doesn't impact the bottom line much, if at all. Even if it should.
